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indirect beneficial ownership of all trust assets. Petitioner
also continued to exercise control over the trust assets after
the transfers.
Although petitioner did not recognize or report any gain
when he transferred his assets to these trusts, the trusts took
depreciation deductions on the transferred assets based on their
alleged fair market values at the time of transfer to the trusts
(rather than on the original cost or depreciated basis in
petitioner’s hands).
In 1995, the Commissioner determined that Henkell and EPS
were engaged in promoting illegal tax shelters designed to claim
excessive and/or improper deductions and assessed penalties of
$1,254,000 each against Henkell and EPS pursuant to section 6700.
In 1997, the Commissioner obtained from the U.S. District
Court for the Eastern District of California an injunction
preventing EPS and Henkell from rendering tax shelter advice. In
United States v. Estate Pres. Servs., 202 F.3d 1093 (9th Cir.
2000), the Court of Appeals for the Ninth Circuit affirmed the
injunction issued by the District Court, holding, among other
things, that EPS and Henkell knowingly made false statements to
taxpayers concerning the tax benefits of the trusts they promoted
as tax shelters.
Petitioner filed Form 1040, U.S. Individual Income Tax
Return, reporting $10,613 in taxable income for 1996 and $13,380
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